A Vision Beyond Cable for Comcast After Merger

Brian Roberts, Comcast’s chief executive, sees its major competitors as the media companies of the future, like Google and Apple.Credit
Tracie Van Auken for The New York Times

Comcast’s chief executive, Brian Roberts, was stung four years ago when Reed Hastings, chief executive of the then-fledgling Netflix, dismissed Comcast with a rhetorical question: “Why would we want to do a deal with a regional cable company?”

If Mr. Roberts has his way, Comcast will soon be neither regional nor cable. With its aggressive push into broadband Internet and its bold acquisition of NBC Universal, Comcast already is no longer just a cable company. If its proposed $45 billion acquisition of Time Warner Cable is approved by regulators, it won’t be regional, either.

And Mr. Hastings is making deals with Comcast now. Last month, Netflix agreed to pay Comcast for faster and more reliable broadband delivery of its streaming service in a potentially groundbreaking deal between a content provider and a broadband distributor.

The deceptively mild-mannered Mr. Roberts doesn’t plan to stop there. Comcast is building a new tower, designed by the star architect Norman Foster, next to its Philadelphia headquarters that will house roughly 3,000 software engineers. He sees the new Comcast as a global technology company and its major competitors the media companies of the future: Google, Amazon, Facebook and even Apple, with which Comcast has been engaging in tentative negotiations.

“The alternative was to sit around and let cable die a slow death,” Mr. Roberts told me this week on a visit to Comcast’s current offices in Philadelphia. “Cable is a relic of an antiquated model,” when municipalities doled out local monopolies to cable operators. “The result is we’re not in New York or Los Angeles. How great can that be?”

Whether Comcast can become a force in New York now rests with regulators at the Justice Department, who are examining antitrust issues related to the Time Warner Cable deal, and at the Federal Communications Commission, which is looking at broader public policy issues. The sheer size of the deal, and the intense public interest in unfettered Internet access, have galvanized an array of opponents, from Senator Al Franken, Democrat of Minnesota, to the Consumers Union to the Writers Guild of America.

I suspect few of them, if any, are Time Warner Cable customers. In a 2013 J. D. Power customer satisfaction survey, Time Warner Cable ranked last in all but one region among television service providers.

Time Warner Cable operates in 29 states, but thanks to the old system of regional and municipal cable monopolies, Comcast and Time Warner Cable don’t compete anywhere. Justice Department merger guidelines define geographical markets, which is why regulators weighing airline mergers examine competition on individual routes, not national market share. In New York, Comcast will simply supplant Time Warner Cable in the array of consumer television and broadband options, which include Verizon’s FiOS service, RCN, DirecTV and the Dish Network.

“Given that these are local markets, and that Comcast and Time Warner Cable don’t overlap, the merger really has no impact on competition,” said Scott Hemphill, an antitrust professor and specialist in intellectual property at Columbia Law School.

Under conventional antitrust standards, it’s pretty much an open-and-shut case. But some opponents have seized on the rarely invoked doctrine of potential competition — the theory that, if Comcast were barred from acquiring Time Warner Cable, it would enter the New York market on its own.

But Mr. Roberts flatly ruled out that possibility, given the prohibitive costs of replicating Time Warner Cable’s infrastructure. As it is, he said Comcast is going to have to spend heavily to bring Time Warner Cable’s network up to Comcast’s standards.

And though it seems unlikely anytime soon, other potential competitors may still enter the New York market. Google has built high-speed fiber networks in three areas — Kansas City, both in Missouri and in Kansas; Austin, Tex.; and Provo, Utah — and plans to expand into nine more. Sprint is talking about using its spectrum for a wireless broadband connection to homes.

In any event, the doctrine of potential competition has rarely been invoked by courts to block mergers. (There have been only three instances, and one was overturned on appeal.)

Critics of the proposed merger have also dusted off a little-used antitrust doctrine called monopsony, arguing that the size of a combined Comcast-Time Warner Cable — the company would control about 30 percent of national pay television subscribers — would enable it to squeeze lower prices from suppliers like Netflix and cable programmers like ESPN. This issue of Comcast’s size and leverage with suppliers has also gotten caught up in the debate over net neutrality, which is the doctrine that all data on the Internet should be treated the same and that broadband providers like Comcast shouldn’t be allowed to charge a premium to heavy users like Netflix.

An error has occurred. Please try again later.

You are already subscribed to this email.

Susan Crawford, a professor at Cardozo School of Law and author of “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age,” has emerged as one of the most persuasive critics of the deal.

Although Professor Crawford, who is currently a visiting professor at Harvard Law School, concedes there’s little or no overlap between Comcast and Time Warner Cable in any relevant markets, “that’s missing the forest for the trees,” she said. “The deal takes an already terrible situation and makes it worse. Comcast has enormous market power where it operates and has the increased ability to stifle innovation in cable boxes, in uses of the Internet and to favor some programs over others. They have a built-in conflict of interest. It’s hard to imagine all that they can do.”

But Professor Hemphill noted that the purpose of antitrust law was to protect consumers, not program suppliers. It’s hard to imagine that the wildly popular ESPN or Netflix needs protection from regulators in Washington. When Time Warner Cable blocked CBS from its cable network in a dispute over fees, customers were outraged, and the cable company largely capitulated to CBS’s demands.

Most monopsony claims fail because consumers end up benefiting from the lower prices a monopsonist can extract from suppliers. If Comcast can negotiate a better deal with programmers, it has an incentive to pass at least some of those savings on to customers to increase demand for its services with lower prices. As Professor Hemphill noted, “Even a monopolist will pass through savings to customers as long as there’s elasticity of demand.”

On a less theoretical level, Comcast is promising a leap in quality for Time Warner Cable customers, who will be in line to gain access to Comcast’s new Xfinity wireless gateway. While in Philadelphia I got a demonstration of the new technology, which moves the brains of the cable box to the cloud and reduces its dimensions to the modest size of a wallet.

As a current Time Warner Cable customer, I’m reluctant to even turn on the television, so lengthy is the menu of mostly unwanted options. (I still have trouble finding “Mad Men” on AMC.) The Comcast interface was clear and easy to use, with colorful graphics and choices tailored to users’ viewing habits.

In the Comcast movie deck, I spotted recent releases — “The Wolf of Wall Street,” “Frozen” and “American Hustle” — any of which could be selected with a click of the remote or, with a Comcast app on a smartphone, by voice command. Each title also displays a Rotten Tomatoes rating. Ask the app, “What should I watch?” and the screen offers choices tailored to your interests. Comcast is also well on its way to making this all available on any device, though rights restrictions still limit what can be downloaded outside the home.

This technology, the product of what Mr. Roberts said has been billions of dollars in capital investment, is a powerful gatekeeper. As Professor Crawford pointed out, in the wrong hands, it could easily be used to favor some providers, like Comcast’s own NBCUniversal offerings, and bludgeon others, like Netflix, into paying high access fees. (Netflix didn’t show up on the Comcast gateway screen, but it’s nowhere to be found on Time Warner Cable, either.)

To gain approval for the NBC deal, Comcast agreed to a long list of conditions that bar discriminatory conduct, go a long way toward guaranteeing net neutrality and generally “enhance the public interest,” in the words of the F.C.C. And acquiring Time Warner Cable would bring those company’s 11 million subscribers under the terms of the agreement.

Regulators may well decide to impose even more conditions as a requirement for approving the Time Warner Cable deal, although Professor Crawford is skeptical that will happen if Comcast gets the go-ahead for the acquisition.

“They’ve never been constrained by any words that tell them what to do,” she said. “They have great lawyers. It’s hard to imagine conditions that would make them consumer-friendly.”

Comcast’s performance on the J. D. Power customer satisfaction survey is only marginally better than Time Warner Cable’s. (Verizon’s FiOS service ranks first in the East.) While conceding room for improvement, Mr. Roberts pledges that will change once Comcast rolls out its new Xfinity service, and he says that the company’s strategy is focused on improving customer experiences.

“We want to be a tech company, not a wire company,” he said. He said he was frustrated that Google and Apple sell their services and products everywhere, but Comcast can’t. “We want to lead, to innovate,” he said. “Why is this controversial?”

A version of this article appears in print on March 29, 2014, on Page B1 of the New York edition with the headline: A Vision Beyond Cable for Comcast After Merger. Order Reprints|Today's Paper|Subscribe